The Hermit Who Crosses Bull and Bear Cycles: Cryptocurrency Market Makers

Market makers in the encryption market are fundamentally not much different from those in traditional finance. However, there are significant differences in operational models, technology, risk management, and regulation. The encryption market is smaller in scale, has lower liquidity, and is more volatile, requiring market makers to be more cautious in risk management. Market makers in the encryption market are also referred to as庄家, and the trading process is difficult to regulate, lacking strict constraints of a market maker system. The relationship between trading platforms, project parties, and market makers is more complex. Market maker activities occur not only in centralized trading platforms but also involve on-chain market making, with some middleware and protocols emerging to serve market making. In terms of technical architecture, the encryption industry requires higher technical capabilities to ensure transaction security.

The market-making business in the encryption market is a blue ocean, providing opportunities for every investor but also accompanied by risks. Currently, US regulations are tightening, and many institutions and businesses are affected. In a bear market, large institutions frequently face crises, making risk management for market makers even more challenging. In addition, encryption market makers are also facing issues such as market fragmentation, low capital efficiency, and regulatory uncertainty.

Even so, encryption market makers still have a large space for development and profit. Future trends in the development of encryption market makers include: diversification of market participants, diversification of market varieties, high business leverage, and obvious head effects. In the investment field, one can pay attention to centralized small market maker strategies or service projects, tools that solve interoperability, and CeDeFi projects.

The Operation Model of Encryption Market Makers

The operation model of encryption market makers is similar to that of traditional financial market makers, mainly providing liquidity and market depth for the cryptocurrency market to profit from it. Encryption market makers typically trade on multiple trading platforms, connecting to trading platforms via API interfaces. They use their own funds and algorithmic models to provide quotes, attracting both buyers and sellers to trade. Some encryption market makers also offer over-the-counter trading services, allowing for large transactions and customized trading.

The encryption market-making process generally includes the following steps:

1. Filter currency pairs: Choose one or more trading pairs depending on market liquidity and the trading capacity of market makers.

2. Quotation: Set the buy and sell prices and publish them in the depth table of the trading platform.

3. Matching Transactions: When traders are willing to match the quotes of market makers, transactions are immediately matched and completed.

4. Risk Management: Use various tools and strategies to control risks, such as trading limits, stop-loss orders, and hedging.

5. Settlement and Clearing: Settlement and clearing are carried out after the transaction is completed, including collecting service fees and paying related costs, etc.

Market makers also need to continuously monitor market conditions, including liquidity, competitor actions, and market risks, and adjust strategies and quotes in a timely manner.

Risks and Challenges Faced by Encryption Market Makers

Encryption market makers face multiple risks, mainly including:

1. Price risk: Due to the high volatility of the cryptocurrency market, the encryption assets held by market makers may incur significant losses.

2. Liquidity Risk: When there is a significant amount of buying and selling pressure in the market, market makers may struggle to provide sufficient liquidity in a timely manner, leading to delays or failures in transactions.

3. Counterparty Risk: The anonymity and decentralized characteristics of the encryption market make it difficult for market makers to determine the credit status and intentions of counterparties.

4. Market Maker Capital Risk: The scale and circulation efficiency of market maker capital determine the level of the market maker. Involvement in deposit and withdrawal is the first threshold.

5. Trading Risks: Including issues such as historical data integrity, strategy model defects, system failures, lack of risk control, and overfitting.

6. Pricing risk: It relates to whether market makers can provide attractive prices, directly affecting profits and losses.

7. Inventory Risk: If asset prices develop unilaterally, there may be risks associated with fluctuations in buying and selling prices.

8. Trading platform risks: including the randomness of trading orders, platform bugs, issues with trading pairs, etc.

9. API Risks: including internal leaks, API interruptions, etc.

10. On-chain risks: such as smart contract vulnerabilities, public chain forks, and slowed transaction speeds.

To address these risks, encryption market makers typically adopt the following strategies:

• Focus on the quality of trades rather than quantity
• Establish good cooperative relationships
• Strict discipline, including exit mechanisms and leverage control
• Inventory Risk Management
• Continuous market monitoring

The Development Trends of Encryption Market Makers

The future development trends of encryption market makers are mainly reflected in the following aspects:

1. Strengthen risk management: adopt more scientific methods and tools to reduce trading risk and credit risk.

2. Develop a more intelligent trading system: Use artificial intelligence and machine learning to improve efficiency and trading quality.

3. Strengthen liquidity: Meet more diversified and complex trading needs, and collaborate with other market participants.

4. Explore new business models: such as market making based on data analysis, cross-chain market making, and other specialized services.

5. Actively try on-chain protocol market making: Participate in on-chain market making activities such as DEX, derivatives markets, etc.

6. Expand new encryption services: such as custody, OTC, primary investment, etc.

7. Participate in more encryption products that require liquidity: such as emerging fields like NFT market making.

Future encryption market makers may present the following characteristics:

• Diversification of market makers, including large investment banks, electronic trading platforms, etc.
• Diversification of market-making varieties, covering various spot and derivatives.
• High business leverage, using leveraged funds to expand scale
• The head effect is evident, and the advantages of large institutions are more prominent.

Overall, encryption market makers need to continuously adjust their strategies and business models, strengthen cooperation with other market participants, to adapt to market changes and promote industry development. At the same time, they also need to be alert to potential risks, such as large market-making institutions actively entering the field to incubate protocols, etc.

Investment Opportunities for Encryption Market Makers

In the encryption market maker track, you can focus on the following investment directions:

1. Centralized small market maker strategies or service projects: Providing tools, data, and customized strategy services for market makers.

2. Projects that solve interoperability issues: such as second-layer middleware, which can interact trustlessly with different chains, seeking the optimal transaction path.

3. CeDeFi Project: Exploring New Models for the Integration of Centralized Finance and Decentralized Finance.

4. Risk management tools: help market makers better control and manage various risks.

5. Efficient cross-chain market-making solutions: Addressing the liquidity fragmentation problem in a multi-chain ecosystem.

6. Intelligent Market Making Algorithm: Utilize new technologies such as AI to enhance market making efficiency and accuracy.

7. Compliance Solutions: Helping market makers cope with increasingly stringent regulatory requirements.

8. Emerging encryption asset market-making tools: Professional market-making tools for new fields such as NFTs, SocialFi, etc.

Investors need to pay attention to factors such as the background of the project team, technical strength, and market demand, while also considering uncertainties such as regulatory risks and market volatility.